| NEW YORK
NEW YORK May 24 The U.S. stock market's break
in its recent rally this week left investors wondering if
they're seeing a turning point or just a blip in the upward
Next week could make it harder to figure out, considering
that the long Memorial Day weekend typically signals the start
of the summer.
The three major U.S. stock indexes posted a decline for the
week on Friday, their first weekly loss since mid-April, raising
some fresh worries that this year's rally may be weakening.
Among the biggest concerns for investors right now is how
soon the Federal Reserve may be ending its stimulus program. The
minutes released this week from the Federal Reserve's latest
meeting showed some officials were open to tapering large-scale
asset purchases as early as at the June meeting.
Volume picked up sharply in the last two days following
Wednesday's release of the Fed's minutes.
"We should have already been prepared for" the Fed's
eventual tapering of stimulus measures, said Bryant Evans,
investment adviser and portfolio manager at Cozad Asset
Management, in Champaign, Illinois.
"The market is perhaps just looking for an excuse to sell
off some gains. And then you throw in the 'sell in May and go
away' philosophy, well, here we are Memorial Day weekend."
The pickup in volume suggested to some a shift in sentiment,
though activity has been below-average throughout the rally,
which has taken the Dow and the S&P 500 to record highs.
Much of that rally has been driven by the Fed's continued
The duration and the scope of the rally have surprised even
veteran market watchers, many of whom have been expecting a
reversal in the trend for several weeks.
The market has managed to avoid any significant pullback
since November, and dips have been used as buying opportunities.
Even with the week's 1.1 percent loss, the S&P 500 remains up
15.7 percent for the year.
Volatility has also not been a problem.
That's why Wednesday's reversal - where the Dow and the S&P
500 both rose more than 1 percent during the morning, but fell
more than 1 percent in the afternoon - caused many investors to
"That's a change. Historically, when you get that kind of a
reversal day, it kind of stalls things out for a while," said
Frank Gretz, market analyst and technician for brokerage Shields
& Co in New York.
But he said the market's up trend has mostly been orderly,
with little divergent action.
Other analysts see some of the market's strong momentum
finally waning. This week's decline caused the S&P 500 to trade
below its 14-day moving average, but the index managed to close
above the level.
In another possible sign of weakening sentiment: Two massive
blocks of puts were bought on Friday on the iShares MSCI
Emerging Markets Fund and the Vanguard FTSE Emerging
Markets Fund, according to options strategists.
The move suggests investors are hedging against a possible
decline in emerging markets in the weeks and months ahead.
"Buyers can only take stocks so far. There's certainly a
little bit of buyers' fatigue setting in, and with the market
being as extended as it is, it's certainly not unrealistic to
think sellers will start to come in and take advantage of the
strength we've had," said Michael James, managing director of
equity trading at Wedbush Securities in Los Angeles.
That's not to say the up trend is over, he said.
BOND YIELDS AND EQUITY GAINS
Some of the recent rally has reflected a push out of bonds
and into stocks.
Equity valuations tend to be lower when real 10-year U.S.
Treasury note yields are above 4 percent or below 2 percent,
Goldman Sachs analysts wrote in a recent research note.
"We expect both real and nominal bond yields to gradually
rise from current low levels," the analysts wrote.
The benchmark 10-year U.S. Treasury note's yield
rose on Friday above the key 2 percent level - the highest in
two months. Treasury yields rose this week after the Fed added
to bond investors' fears that the U.S. central bank might slow
its bond purchases later this year if the economy improves
Investors are trying to determine if yields are likely to
climb on stronger growth and a more hawkish stance by the Fed.
Economic data has remained mixed, adding further uncertainty
to market projections.
Next week brings May consumer confidence data on Tuesday and
preliminary data for first-quarter gross domestic product on
Thursday. On Friday, personal income and consumption data for
April is set for release, along with the final reading on
consumer sentiment for May from Thomson Reuters/University of
Michigan, and the ISM-Chicago business survey, also known as the
Chicago Purchasing Managers Index, for May.
(Wall St Week Ahead runs every Friday. Questions or comments
can be emailed to: caroline.valetkevitch(at)thomsonreuters.com)